Posted on Saturday, January 15, 2011
While problems in the foreclosure process will impact the market in the 4th quarter, the 3rd quarter was telling for the long-term trend of the nation's housing market. In the wake of the Federal tax credit home sales plummeted, but price trends were a mixed bag with some markets declining while others held firm or expanded. Resilient price growth 3rd quarter and improved employment growth suggested that fundamentals were firming though still weak. These are a few of the insights contained the 152 Local Market Reports for the 3rd quarter of 2010. The Local Market Reports provide a wealth of information on market conditions in your areas.
Home sales slipped in the 3rd quarter following the end of the Federal tax credit. Compared to the 3rd quarter of 2009, the sharpest declines in home sales were felt in Midwest and Northern Midwest including Minnesota, North Dakota, Nebraska, Wisconsin, and Missouri. However, the 3rd quarter trend only tells part of the story. Sales surged in the 2nd quarter as buyers rushed to the market to take advantage of the tax credit. The largest swing in year-over-year sales growth occurred in North Dakota where sales growth swung 86.1 percentage points from a gain of 51.9% in the 2nd quarter to a 34.3% decline in the 3rd quarter. Following closely behind were Iowa with a 63.5-point swing, Pennsylvania (60.7 points), Massachusetts (54.9 points), and Kentucky (54.6 point). The average change was 42.5 percentage points, but California and New York experienced relatively small changes at 12.7 points and 11.0 points, respectively. Arizona and Florida were also below the average swing with 18.2 points and 25.1 points, respectively. A simple correlation test showed a robust relationship between those states with the strongest year-over-year gains in the 2nd quarter and those that fell the most in the 3rd quarter. This suggests that markets which had either been strong prior to the credit or which had never expanded continued on this pattern and that the credit may have "pulled forward" demand from the summer into the spring in areas where there was an impact. One reason the sales decline in the 3rd quarter may have been smoothed in markets like Florida, Arizona, Nevada, and California is due to the dramatic price corrections in 2009 which attracted investors to these markets. Investors' purchase decisions would not have been impacted by the tax credit and, thus, this group may have sought bargains in the post-credit period.
The impact of the tax credit on sales trends was stark, but it was not as drastic on home prices. In the 2nd quarter, 97 metro areas of the 152 covered by NAR Research experienced an increase in the median home price compared to a year earlier. By the 3rd quarter that figure had fallen to 74 markets. However, 62 markets improved relative to the 2nd quarter with 14 experiencing a positive year-over-year gain for the first time and 28 extending positive year-over-year price gains from the 2nd quarter. The remainder where markets that were down from a year ago, but were approaching a price bottom.
Of the markets showing an expansion of price gains, most were small to mid-sized cities. Notable exceptions were Washington and Dallas. Several of these markets were clustered in New England, including Buffalo, Syracuse, Erie, Elmira, Albany-Schenectady-Troy, Barnstable, Newark-Union, Allentown, Hartford, and Kingston. Atlantic City and Ocala (Florida) made this list after sharp price corrections in 2008 and 2009. At the other extreme, 90 markets experienced a decline in the year-over-year growth of prices between the 2nd and 3rd quarters. Markets in states where sales were resilient, but face high shadow inventories such as Phoenix, Miami-Fort Lauderdale, Las Vegas, Sarasota, Orlando, Tucson, and other markets in Arizona, Florida, Nevada tended to experience a shift in the year-over-year price trend from positive to negative or extended their negative trend, while markets in California mostly saw a softening in their recent positive gains. Several markets in the Midwest and Texas which were late to experience price declines saw this pattern extended in the 3rd quarter.
While home prices and sales volume where heavily distorted by the Federal tax credit, the economy continued to exhibit slow, but steady improvement. Job creation was lackluster relative to a typical expansion, but employment levels showed steady improvement and fewer layoffs relative to the same time last year. The strongest gains in year-over-year job growth for September were Kennewick-Richland-Pasco (4.8%), Charleston-North Charleston (2.1%), Austin-Round Rock (2.0%), Washington-Arlington-Alexandria (1.8%), and Durham (1.5%). A total of 72 markets showed an expansion of year-over-year gains in employment between September and August, while an additional 38 markets experienced a pattern of movement toward a neutral position or bottom for total employment. This strength was widespread and included markets with high shadow inventory levels. Stronger employment is important for the health of all markets as it instills confidence in recent buyers and fence sitters and builds up the reserve of future home buyers.
The strengthening economic picture and price improvements in the spring and summer helped the foreclosure outlook. While the number of foreclosure filings will no doubt decline in fall and then climb in the winter as a result of the legal issues surrounding the use of mass signatures, the trend going into the fall was of strengthening. The foreclosure rate on prime loans remains highest in those areas that were hit hard by the sub-prime crisis, particularly markets in Florida, Arizona, California, and Nevada. However, of the seven markets that experienced an improvement in the prime foreclosure rate between February and August of 2010, four were in those states: Cape Coral-Fort Meyers, San Jose-Sunnyvale-Santa Clara, Santa Ana-Anaheim-Irvine, and San Diego-Carlsbad-San Marcos. In each of these cases, the median home price was higher in the 3rd quarter of 2010 than a year earlier, but had slipped from the 2nd quarter and employment had improved.
Delinquency rates fell in the majority of markets between February and August. Once again stronger prices and job growth helped to boost affordability and confidence. Of the 152 markets covered in this report, 137 experienced a decline in the 90-day delinquency rate, while the 60-day delinquency rate fell in 139 markets. The drop in delinquencies is likely to reduce the flow of properties that end up in foreclosure. Consequently, the decline in foreclosure rates this fall are likely due to both the impact of the moratorium by banks and a decline in delinquent properties in the pipeline.
The 3rd quarter provided the first glimpse of how housing markets around the nation will behave in the absence of market distortions. Home sales fell sharply in the 3rd quarter following the end of the Federal tax credit, but the boost to sales in the 2nd quarter helped to lift 3rd quarter prices above those from a year earlier and to staunch mortgage delinquencies. Economic fundamentals gained steam and the trend was positive, but weak. The bank moratorium will likely distort the 4th quarter results leaving the market's true nature to be discovered in the spring. For information on any of the 152 markets covered in this article, see NAR Research's Local Market Reports for the 3rd quarter.
By Ken Fears, NATIONAL ASSOCIATION OF REALTORS